The 100 Minus Age Rule for Allocation

Yesterday we talked in general about portfolio allocation, particularly as it pertained to stocks. It can be confusing to decide what to do with an investment portfolio, especially if you are new to the idea of investing.  Two simple rules to help with the decision are: the 100- Age Rule and the 120- Age Rule.  Let’s look at some of the ideas behind each rule to help you decide your best course of action in setting up your portfolio.

100 Minus Age Rule

A 100- Age Rule has existed for quite a while in the investment portfolio world.  Investment bankers often encourage investors to place 80% of their portfolio into stocks and 20% into bonds while the investor is in her 20’s; 70% into stocks and 30% into bonds in their 30’s; and so forth.  The idea behind plugging more money into stocks in youth is that young investment portfolios can ride the stock waves more easily than a mature investment portfolio.  There is a lot more money at stake for a mature portfolio with fewer years to recover than in young portfolios.

This rule has proven helpful in the recent stock market crash.  Those who invested wisely using the 100- Rule have found they will be able to recover from the crushing market losses.  I know 50-year-olds who lost half of their stock portfolio in the market crash, but they still have bond money socked away.  They will also be able to recover when the market bounces back by padding their portfolios with the extra income they have from paying off their mortgage.  Yes, the money was slated for other dream items, but the important thing is that the money is recoverable by paring back on unnecessary purchases (like the boat my friends wanted to buy).

120 Minus Age Rule

However, some experts have begun citing a 120- Rule.  They claim that since people are living longer, they need to invest as if they will be living until 120 years old.  Simply replacing the 100 with 120 is predicted to prepare investment portfolios for longer retirement. 

Examples of the 120- rule include investing 100% in stocks in your 20’s; 90% in stocks in your 30’s; and so forth.  Since retirement ages are predicted to lengthen as people age, this may be a good idea for some young investors.  I, for example, am 30 years old, and my minimum retirement age is suggested to be 68 years old.  I have followed the 120- Rule through my 20’s, and even over the recent stock speed bump I am still on track to retire with an estimated $1,000,000 in my portfolio.  Although, my million dollar dream is 38 years left in the making, I believe the 120- Rule helped me invest well in the few years before the crash (and the crash was truly a speed bump for my small amount of capital). I know I will recover easily when the market bounces back, although, entering my 30’s, I will need to move to the 90% stocks, 10% bonds soon.  I just keep hoping the market will bounce up before I make my move.

Either, Or

Whether you prefer to invest based on the 120- Rule or the 100- Rule, both basic guidelines can assist you in building a stock portfolio that will support your retirement dreams. 

I believe risky investments, like a 100% stock portfolio, are good options for young people just entering the investment world, however, it is understandable to prefer a 100- Rule.  Either rule will start padding your portfolio, but a few years of stock investing can only jump-start your savings plan.

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